Jet Fuel Could Double by April; Indian Airlines, OMCs Move to Limit Damage

Indian airlines and state-owned oil marketing companies (OMCs) are in discussions to revise the pricing model for aviation turbine fuel (ATF) to protect the aviation sector from surging costs triggered by the West Asia crisis, the Economic Times reported.

At the centre of the talks is a proposal to cap the "crack spread", the difference between the market price of crude oil and the jet fuel refined from it, which reflects the cost of refining, within a fixed band.

How the Proposed Fix Would Work

Both sides are working toward setting a ceiling of $22 per barrel and a floor of $10 on the crack spread component used in the ATF pricing formula, the report added.

The talks involve officials from the Ministry of Civil Aviation and the Ministry of Petroleum and Natural Gas, along with the three state-owned OMCs, Indian Oil, Hindustan Petroleum and Bharat Petroleum.

The ATF pricing discussions follow a separate measure taken last week, in which the government imposed export duties on diesel and ATF while cutting domestic levies on petrol and diesel to ensure adequate domestic supply and shield consumers from rising global oil prices.

Addressing an Inter-Ministerial Briefing on Recent Developments in West Asia, Vivek Chaturvedi, Chairman of the Central Board of Indirect Taxes and Customs, said the aim of these measures is to prioritise domestic availability of diesel and ATF and ensure energy security amid global uncertainty and supply chain disruptions. He said the government's response has been "calibrated," introducing export duties through the Special Additional Excise Duty (SAED) and Road and Infrastructure Cess (RIC). He added that duties on petrol are tied to current crack margins and will be reviewed fortnightly.

Why Formula is Now Under Stress

Indian OMCs revise ATF prices on the first of every month, based on a weighted average of international benchmarks including crude oil prices and the crack spread, plus logistics costs. While crude prices have risen since the West Asia conflict began, the crack spread has climbed far more sharply, partly because Iran threatened to close the Strait of Hormuz, disrupting supply chains.

According to the International Air Transport Association (IATA), the crack spread surged from $24.28 per barrel in the last week of February to $86.22 by March 20, a rise of over 250%.

The proposed band essentially functions as a price hedge. If the crack spread falls below $10, OMCs stand to gain. If it rises above $22, the oil companies would sacrifice a portion of their margin, but airlines would be shielded from an abnormal cost spike. The crack spread has historically averaged around $14 per barrel over the long run, the Economic Times noted.

Without a revised agreement, the consequences for airlines could be severe. If the current pricing model remains unchanged, jet fuel could cost over ₹2 lakh per kilolitre from April 1, a level airlines are seen as unable to absorb.